Pestech  has secured its third contract worth MYR85.0m from Sarawak Energy SB (SEB) for an extension job of substations  in Mambong and and  Entinggan  located  in  Kota  Samarahan,  Kuching.  This  is  to  facilitate  the  cross-border  energy  supply  to  West  Kalimantan.  With  the inclusion of  this  newly awarded contract,  the  total  order book  has  increased to MYR425m.  We are adjusting our  FY14 net profit forecast slightly higher by 1% after factoring  in  profit recognition  from  this recently  awarded contract.  We continue to like the company for its: i) strong MYR425m order book  as at  15 Jan 2014, ii) growing energy demand worldwide, and  iii) expansion into switchgear manufacturing.

We are upgrading our FV on Pestech to MYR3.52  from MYR3.12, pegging its FY14 EPS to a  higher  target P/E of 12x.  We deem the higher target P/E of 12x fair as it implies a 3-year average PEG of 0.3x. Maintain Buy. Won a  MYR85.0m contract  from SEB.  The company announced that it has secured  its third  contract  from SEB. The contract,  which is worth MYR85.0m, involves  the design, engineering, procurement, construction, testing and commissioning of SEB's Mambong  and Entinggan 275 kV substation  extension  project.  Both  substations  are  located  in  Kota  Samarahan,  Kuching.  Pestech  will  also  install  a  275kV  capacitor  bank equipment to improve  the  power quality of  electrical network around Kuching, as well as  protection system retrofitting works at  the  Matang 275/33kV substation that connects  the  Mambong substation.  The project is an interconnection point for electric power export from Sarawak to  West  Kalimantan,  Indonesia.  It  also  serves  to  improve  the  reliability  and  security  of  the  275kV  electrical  transmission  network  around Kuching.

Cross-border energy supply to West Kalimantan. Talks on the possibility of exporting energy to West Kalimantan are  not new. The Indonesian power  utility,  PT  PLN  Persero  (PLN)  has  announced  that  both  SEB  and  PLN  are  looking  into  constructing  a  transmission  line  connecting Mambong to Bengkayang in West Kalimantan back in July 2011, with an initial feasibility study undertaken in 1994.  According to The Star (16 Sept  2013),  the  Asian  Development  Bank  (ADB)  has  approved  a  funding  of  USD49.5m  in  September  2013  for  the  83km  cross-border  highvoltage transmission line and substation project. It was reported that  the ADB was in the midst of  preparing  a second loan package to finance the 45km transmission line project in Sarawak, which will connect the SEB substation in Mambong and Bengkayang in West Kalimantan.

More jobs in Sarawak.  To date, Pestech has five  on-going projects in Sarawak  including  three  contracts from Asia Cement,  OM Materials  and Metix  Malaysia  in  Samalaju,  as  well  as  two  existing  jobs  from  SEB  for  the  construction  of  substations  in  Murum  Junction  and  the  MAPAI projects. With the inclusion of this  newly awarded contract from SEB, the total order  book would be further boosted  to MYR425m, equivalent to 3.1x of its total sales of MYR136.1m in FY12.

Maintain BUY, with MYR3.52 FV. We remain optimistic on the company’s outlook, underpinned by its: i) strong MYR425m order book as at 15 Jan 2014,  ii)  growing energy demand worldwide  that would further provide opportunities to the energy transmission system industry,  and iii) expansion into switchgear manufacturing. We have tweaked our FY14 forecasts higher, with revenue and net profit forecasts up by 6% and 1% respectively  after inputting profit recognition from this newly awarded contract.  We are reiterating  our BUY  call with a higher FV of  MYR3.52 (from MYR3.12), pegged to a higher  target P/E of 12x, which is still below its highest P/E of  14.5x since listing. We deem  the higher target P/E of 12x  fair as it implies a  3-year average PEG  of 0.3x. The valuation is also justified by expectation  on its ability to secure  higher order book  in the next two years, with its YTD order book of MYR425m at its record high since inception.

Source: RHB